Punch-Drunk Investors & Extinct Bears
Rydex Ratios Go Bonkers, Bears Are Dying Off
For many years we have heard that the poor polar bears were in danger of dying out due to global warming. A fake photograph of one of the magnificent creatures drifting aimlessly in the ocean on a break-away ice floe was reproduced thousands of times all over the internet. In the meantime it has turned out that polar bears are doing so well, they are considered a quite dangerous plague in some regions in Alaska. Alas, there is one species of bear that really is in danger of going extinct – only this one lives on Wall Street, or let us rather say, it vegetates on Wall Street these days.
Similar levels of complacency as were evident in the AAII data were reflected in Rydex ratios, which streaked to fresh extremes in recent weeks. The bull/bear asset ratio reached an astonishing new all-time high of nearly 36 at one point (i.e., bullish assets were 36 times larger than bearish assets), with bear assets crumbling to a new record low.
The leveraged Rydex ratio streaked to a new all-time high of 18.70 right at the turn of the year (note: from 2001 to 2012 a leveraged ratio above 2 was actually considered “extreme”).
The pure Rydex bull/bear ratio and total Rydex bear assets. We have left our annotations unchanged since the last time we showed this chart, since we have nothing new to add to this. What is new is only that the ratio actually surged to 36 – which was more than double the level it hit at the peak of the tech mania in February/March 2000. That is quite incredible.
The new record high in the leveraged Rydex ratio was set on December 29. Since then its volatility has increased quite a bit. About of what traders must have thought of as timely profit-taking at the beginning of the year was quickly replaced by regret and an immediate rush back into leveraged long funds – at higher prices.
